NCPA - National Center for Policy Analysis

NCPA Plan to Save Social Security

September 9, 2002

In just 15 years, Social Security will begin paying out more than it collects in taxes. [See Figure I.] In each following year, the deficit will grow larger. Over the next 75 years, Social Security faces a total debt of $25 trillion (measured in current dollars).

If the program is not reformed, Social Security benefits for baby boomer retirees and all subsequent generations must be cut because current law requires that benefits be limited to the program's income. That means that beginning in 2041 -- when all the Treasury IOUs in the trust fund have been reclaimed -- benefits will have to be cut to match payroll tax revenues.

A plan developed by the National Center for Policy Analysis (NCPA) that combines attractive features of major proposals made over the past several years would allow younger workers to voluntarily deposit two percentage points of their current 10.7 percent payroll tax in a personal retirement account (PRA) they would own and control. Workers would choose from select portfolios that reflect the market as a whole and are sponsored by government-approved fund managers.

The NCPA proposal assumes each dollar in an individual's account would reduce the government's obligation by a dollar. With these reforms, Social Security would be able to pay promised benefits with the current tax rate by the time today's teenagers retire. Without reform, taxes will have to increase by up to 50 percent. With reform, taxes will equal benefit payments by 2058, and Social Security will run annual surpluses thereafter. To pay full benefits between 2008 and 2058, the simulation assumes the government makes up the difference by borrowing.

By contrast, using the Social Security surplus to pay down the publicly held debt and borrowing the money back once deficits appear would vastly increase the national debt. [See Figure II.]

Source: John C. Goodman and Matt Moore, "How to Save Social Security," Brief Analysis No. 417, September 9, 2002, National Center for Policy Analysis.

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